Maldives’ new president set to take office as debt alarms intensify

October 30, 2023 2:06 pm

BY MARWAAN MACAN-MARKAR

MALE – When the Maldives’ President-elect Mohamed Muizzu takes office on Nov. 17, he will immediately face a rising tide of warnings on the risk of a debt crisis in the Indian Ocean archipelago.

The World Bank was among the latest to sound the alarm over the South Asian nation’s ballooning foreign debt payments. Barely a week after Muizzu won the Sept. 30 presidential runoff against incumbent President Ibrahim Mohamed Solih, the bank pointed out that by 2026, the $5.4 billion Maldivian economy will have to service a record $1.07 billion in external debt.

The bank’s latest assessment added to existing concerns about Male’s obligation to spend an average of $300 million a year to service foreign debt from 2022 to 2024. The heavy burden places the strategically situated country among a growing group of Asian economies buckling under unsustainable debt, including Pakistan. The worst-case scenario was seen recently in nearby Sri Lanka, which defaulted last year.

The Sri Lankan parallel resonates with many Maldivians who have either lived in their closest South Asian neighbor or have relatives there. “We know what happened in Sri Lanka not just through newspaper headlines but because we have close ties and knew how the economic collapse affected our close Sri Lankan friends,” speaker of the parliament and former President Mohamed Nasheed said during an interview in the parliamentary complex. “We have learned a lot from Sri Lanka and we must be careful.”

A week after the World Bank’s warning, Fitch Ratings also chimed in, flagging similar caution about the Maldives’ “high and rising government debt burden, low foreign-reserve buffers, and its vulnerability to shocks that could undermine prospects for the tourism industry.”

In 2025, the global ratings agency added, the country will have to service $363 million in external debt.

Muizzu is inheriting an economy in which foreign reserves have been declining. The midyear figure was estimated at $702.2 million, down from $790 million at the start of 2023, according to the Maldives Monetary Authority, the country’s central bank.

Of that, usable reserves were estimated at just $168.1 million, enough to pay for only two and a half months of imports in the heavily import-dependent country, the MMA’s figures revealed.

The “public debt level remains high and external financing needs are projected to rise and draw on the already thin reserve buffers, increasing debt rollover risks,” Piyaporn Sodsriwiboon, Maldives mission chief for the International Monetary Fund, told Nikkei Asia.

She explained that the fund’s assessment that the Maldives faces “high risk of debt distress” stemmed from its debt sustainability analysis, into which the country’s “debt profile and debt-carrying capacity” were factored.

In December, the IMF issued a mixed review of the Maldivian economy following an Article IV Consultation — a regular discussion officials from the fund have with member countries to assess their economies based on prevailing financial and economic information.

The economy had rebounded from the impact of the COVID-19 pandemic, led by a recovery in the tourism sector, with total public and publicly guaranteed debt to gross domestic product declining from the pandemic peak of 154% in 2020, it noted. Currently, the Maldives’ total debt is 110% of GDP, the fund added.

External debt servicing for 2026 includes settling a $500 million sukuk Islamic bond and a $100 million bond issued under a private placement. “The largest risk that needs to be addressed is the refinancing risk of [the bond payments],” Finance Minister Ibrahim Ameer said in a late September commentary published by an online Maldivian news outlet.

The $600 million bonds are “a significant amount to repay within a given year, especially on top of routine debt payments [of around $300 million],” he said.

The outgoing Solih administration already heard its share of warnings in the past year. JPMorgan Chase, one of the world’s largest banks, put the country on edge when media reports quoted its analysts stating that the Maldives could run out of foreign reserves by 2023. The Maldives was on a list of 52 countries, including Sri Lanka, which JPMorgan stated were at the risk of defaulting in the wake of challenging global economic conditions worsened by Russia’s war in Ukraine.

Diplomats from Asian and Western missions in the Maldives are watching closely as Muizzu — viewed as pro-China following the anti-Indian tone of his election campaign — gets set to govern. Lost on no one are the countries that have lent money to the Maldives and the potential for the debt to have geopolitical implications.

China and India are the largest lenders, along with Middle Eastern nations.

“The new government will have to find solutions to the debt crisis from its early days,” remarked one diplomat from a Western mission. “A geopolitical twist is possible if financial relief is sought from bilateral lenders.”